The Court of Appeal addresses the validity of interim payments for sub-contractors

A & V Building Solutions Ltd v J & B Hopkins Ltd [2023] EWCA Civ 54

A recent Court of Appeal judgment held that a sub-contractors interim payment application was valid despite being submitted one day after the date specified in the sub-contract. This case also serves as a reminder to the losing party to comply with adjudicators decisions before issuing court proceedings.

Background

• J & B Hopkins Limited (“Hopkins”) was the main mechanical and electrical contractor on a project to build a new campus for the University of Brighton.
• A & V Building Solutions Limited (“AVB”) was its sub-contractor.
• Hopkins’ standard terms formed the basis of the sub-contract, and its procedure for interim monthly payments was that:
  • Every month AVB was to submit an application to Hopkins setting out the amount owed.
  • Hopkins would then pay AVB what Hopkins considered due.
  • In short, if AVB did not make the application it was not entitled to payment and the date for the application was 10 days prior to the date for the valuation by Hopkins.
• A table in Appendix 6 of the sub-contract set out the application and valuation dates for each month. However, at the end of the table a note stated that AVB’s applications had to be served 7 days before the valuation date, as opposed to the 10 days referred to in Hopkins standard terms. So there was a possible ambiguity within the contract; between Hopkins standard terms and the specifically negotiated Appendix 6; if 7 days applied rather than the 10 days, AVB’s application would have been submitted in time.
• In March 2021, the application date fell on a Sunday. AVB submitted it the following day, assuming it would not be an issue.
• On a previous occasion, Hopkins made payment despite an application having been made the day after that specified in the table.
• Further, Hopkins initially treated this particular application as being valid.
• By November 2021, AVB had not received payment for its application, so commenced a “smash and grab” adjudication against Hopkins.
• After commencement of the adjudication, Hopkins for the first time claimed that the application was invalid because it was provided one day late.
• The Adjudicator decided that the application was valid and made an award in AVB’s favour.
• Hopkins failed to pay and AVB commenced enforcement proceedings.
• While the enforcement proceedings were still pending, Hopkins issued a Part 8 claim against AVB for a court declaration that the application was invalid.
• The Part 8 claim was heard in April 2022, before adjudication enforcement proceedings had concluded. The judge held that AVB’s application 14 was invalid as it was made a day late.
• AVB appealed on the basis that;
  1. The judge should have struck out the Part 8 claim as an abuse of process
  2. The application was valid
  3. AVB had a valid argument on variation, waiver and estoppel.

Decision and Commentary

The Court of Appeal allowed the appeal. The 3 key elements to the decision were as follows;

1. Abuse of Process

The Part 8 claim did not amount to an abuse of process. However, it was inappropriate as the adjudicator had already determined that Hopkins should pay AVB.

This is not new law; the general rule is that adjudicator’s awards should be paid before the paying party can pursue the matter in court or arbitration i.e. pay now; argue later.

2. Validity of the application

Standard practice is that parties claiming they are entitled to payment under an application will have ensured that their application was issued within the correct timescales, in the correct form, and served properly.

The situation in this case was not so clear cut. The Court of Appeal held the application was valid in this case as a result of the principles of contract interpretation which mean that any discrepancy between standard terms and specifically negotiated terms will be resolved in favour of the latter.

3. Estoppel

The fact that Hopkins had made payment where a previous application for payment had been submitted a day late was not sufficient to establish a common understanding that AVB could rely on. However, estoppel did apply because:

1. Hopkins had treated the application as being valid for 8 months, so AVB didn’t think it was necessary to re-submit in the next monthly cycle (which would have resolved any issue of validity)
2. Hopkins had been engaging in the detail of the application and it was not until the adjudication was commenced that it claimed it was invalid. By not even seeking to reserve the position in respect of validity, Hopkins was held to have affirmed the validity of the application.

Discussion

Therefore, the lesson to take from this is that the paying party should always reserve its position regarding the validity of any payment application/notice issued by the other party.

Interestingly, both parties were criticised for ignoring the “pay now, argue later” principle when AVB, in a second adjudication, failed to pay the sums awarded to Hopkins!